WASHINGTON - The Federal Reserve Board is investigating whether banks are illegally "tying" their loans to underwriting assignments, according to Chairman Alan Greenspan.
In an Oct. 2 letter to Rep. John Dingell, D-Mich., and Rep. Edward Markey, D-Mass., Greenspan said his staff has requested information from a number of underwriting units of bank holding companies to see whether they are complying with federal laws that bar banks from illegally linking services.
While the letter does not specifically say the Fed is looking into municipal deals, congressional aides and industry representatives say they believe they are.
A spokesman for Greenspan could not confirm whether municipals are included.
Several Wall Street firms, including Morgan Stanley & Co., have said publicly that tying arrangements seem to be increasing in both municipal and non-municipal deals.
Philip Lacovara, managing director and general counsel of Morgan Stanley, said the Fed asked the firm to provide information it has collected on occurrences of tying.
"We provided a number of different lists and analyses." Lacovara said. "One was a report summarizing the involvement of commercial banks and securities affiliates in municipal new-issue markets, and we suggested that the data show an unusually high correlation between a bank's involvement in credit enhancement for a deal and its affiliate's position as a lead underwriter in a transaction."
"We have presented information that we believe represents the experience of all of the independent investment banks," Lacovara added. "The Securities Industry Association has also submitted material to the Fed concerning bank tying."
Two weeks ago, an official with the Office of the Comptroller of the Currency said his agency is investigating tying charges in municipal deals.
Owen Carney, senior adviser for investments at the comptroller's office, said that so far the agency's probe suggests a tying problem may exist.
Some of the complaints the comptroller's office is reviewing were forwarded to the agency by Securities and Exchange Commissioner Richard Roberts earlier this year. Roberts strongly urged the securities industry last week to push for more action by regulators and the courts to block tying.
"The securities industry has a window of opportunity to, in effect, put up or shut up," Roberts told a dinner held by the association. "I challenge the industry to at least press for more aggressive enforcement action."
In his letter to Dingell and Markey, Greenspan said, "Staff has recently asked for information from a number of Section 20 subsidiaries concerning their procedures for compliance with the anti-tying laws. In addition, the board is currently investigating allegations of tying that do not involve section 20 subsidiaries." A Section 20 subsidiary is an underwriting unit of a bank holding company.
Dingell chairs the House Energy and Commerce Committee, and Markey chairs that panel's subcommittee on telecommunications and finance.
Bank tying, which is barred under the Bank Holding Company Act of 1970, occurs when a bank illegally links one service to another. It can occur in the municipal bond area when a bank says it will not provide a credit enhancement unless it is made an underwriter of a deal.